Thursday, August 27, 2009

Inside The Deal Numbers

Fascinating stuff in the Trib today on the structure of the sale. Ameet Sachdev has done an excellent job reporting this story. He notes today several key points, not the least of which is a $35 million reserve fund:

The $35 million, the document said, represents reserves that the family will provide to support the Cubs once it takes control of the team, which is expected in the fourth quarter. The reserves are similar to a rainy day fund.

The cushion should not alarm Cubs fans about the team's financial strength, but it speaks volumes about the highly complex financial deal engineered by Tribune Co. to sell one of Major League Baseball's storied franchises.

Please. Don't be frightened. ALL IS WELL!

Deal valuation:

Court documents also shed more light on how the family is financing a deal that values the Cubs, Wrigley Field and related broadcast assets at $845 million. That's 3.5 times the team's 2008 revenue of $241 million, court papers said, making it one of the richest deals in recent baseball history.

Cash use:

The family will contribute $150 million of equity to the partnership and lend it another $248.8 million. The family also is borrowing $425 million from five banks, including JPMorgan Chase and Bank of America, that will be placed in the partnership.

In exchange for the $823.8 million, which does not include the reserve cash, the Rickettses will receive 95 percent of the partnership. Tribune Co. will own 5 percent of the entity and receive $740 million after taxes and other adjustments.

Oh ho! $425 million in bank debt? That’s up from the $350 million that was always reported previously. Looks like the $100 million private placement didn’t go so well. Maybe that’s why we stopped hearing about it. And there’s a big part of the reason the price fell from $900 million to $800 million $843 million.

The Ricketts’ portion is $398.8 million. That fits with the $403 million in TD Ameritrade stock they sold back in the spring. It’s just now structured part as equity, part as debt. That debt piece is surely to help Sam Zell avoid taxes.

Baseball's debt-service rule limits a team's debt to 10 times its cash flow, defined by the acronym EBITDA (earnings before interest, taxes, depreciation and amortization).

The Cubs' annual cash flow, sources said, is about $30 million, not including the profit distribution from a 25 percent stake in Comcast SportsNet Chicago.

It would seem the team's debt, including bank and family loans, would total $673.8 million, an apparent violation of league rules. But sources said that MLB tends not to count debt contributed by an owner because the owner will have to pay the banks first.

If MLB is only counting the $425 million as debt in the Cubs transaction, then the Ricketts will comply with league rules, but just barely, at the team's current $140 million payroll.

Counting the Ricketts' $248.8 million as not truly debt is standard. Subordinated debt as this appears to be is often considered equity by lenders. No reason that MLB wouldn't do the same to get this deal closed.

The annual interest payments on the bank debt are expected to be about $27 million, sources said.

$27 million on $425 million in debt equates to an interest rate of 6.35%. For reference, the prime rate right now is 3.25%. On $425 million in debt, each 0.25% increase in interest rate equates to a $1 million increase in debt service costs. Net cash flow after payroll was $30 million before Comcast profits. Does this means a 0.75% increase in interest rates, which is expected to occur by this time next year, would leave the Cubs with negative cash flow? Well, at least at the current payroll?

Hard to believe payroll will increase without additional equity injections from the Ricketts.

Considering the slim margin, the $35 million reserve fund made the partnership structure more palatable to baseball, said one high-ranking league official.

"We thought it was a safe number for protection purposes if anything ever went south," the source said.

Yeah. A one year interest cushion is pretty good. Especially if it’s held on deposit with the lender banks.

Wednesday, August 26, 2009

If The Deal Breaks Up

A few months ago, this page speculated that the nuclear meltdown scenario for the owner of the Cubs was the league itself, Major League Baseball. Further speculation was that an 11th hour higher bid could be accepted by the bankruptcy court against the wishes of the other MLB owners who have to approve a sale.

The idea was scoffed at by others, including a WGN radio host who stated as fact that the vote of MLB owners would supersede that of a bankruptcy judge. Ivy Chat found that hard to believe that a court would put the wishes of a group of high net worth business executives ahead of creditors actually owed money.

A group headed by Jerry Reinsdorf has pulled out as a potential buyer of the Phoenix Coyotes just as the NHL filed a bid in U.S. Bankruptcy Court to purchase the team and keep it in Arizona....The NHL bid apparently was the only one filed by the deadline that would keep the team in Arizona. Canadian billionaire Jim Balsillie filed an amended purchase agreement on Monday offering $212.5 million, contingent on moving the franchise to Hamilton, Ontario.

If Judge Redfield T. Baum throws out Balsillie's offer because the NHL board of governors rejected his application, by a 26-0 vote, to own the Coyotes, that could leave the league with the only bid. Balsillie wants the judge to overrule the NHL's vote based on bankruptcy law and the fact that he says his offer would provide the most money to creditors.

The NHL did not say how much the league was offering to buy the team, which is scheduled to be sold at auction on Sept. 10.

This really bears watching. If the team ends up in the hands of Balsillie, so much for the voting to hand one franchise to another.

The ownership clubs would have a neat little hole ripped in their walls.

Mr. Shlabotnik: Um...now look...now look, mate, I've definitely 'ad enough of this. That team is definitely deceased, and when I watched it not 'alf an hour ago, you assured me that its total lack of movement was due to it bein' tired and shagged out following a prolonged at bat.

Mr. Shlabotnik: Look, I took the liberty of examining that team when I got it home, and I discovered the only reason that it had been sitting on its perch in First Place was that it had been NAILED there.

(pause)

Broadcaster Ron: Well, o'course it was nailed there! If I hadn't nailed that team down, it would have nuzzled up to those bars, bent 'em apart with its bat, and VOOM! Feeweeweewee!

Mr. Shlabotnik: "VOOM"?!? Mate, this team wouldn't "voom" if you put four million volts through it! 'Ere bleedin' demised!

Broadcaster Ron: No no! 'Ere pining!

Mr. Shlabotnik: Ere not pinin'! Ere passed on! This team is no more! He has ceased to be! Ere expired and gone to meet 'is maker! Ere's a stiff! Bereft of life, 'Ere rests in peace! If you hadn't nailed 'em to the perch 'ere'd be pushing up the daisies! 'Is metabolic processes are now 'istory! Ere off the twig! Ere kicked the bucket, Ere shuffled off 'is mortal coil, run down the curtain and joined the bleedin' choir invisible!! THIS IS AN EX-TEAM!!

(pause)

Broadcaster Ron: Well, I'd better replace it, then. (He takes a quick peek behind the counter) Sorry squire, I've had a look 'round the back of the shop, and uh, we're right out of teams.

Tuesday, August 25, 2009

To Do List Fisking: Carol Slezack

As everyone is making lists of what the Rickettses should do if/once they close on the Cubs, it would be fun to critique what these others are suggesting. The Evil Step Father (aka ESF) tipped the Carol Slezak column in the Sun Times as a "realistic" approach to turning the Cubs around. Please note that ESF is a White Sox fan who hails from Ohio. Perhaps that explains why he is unaware that William Strunk specifically noted that the words "Slezak" and "realistic" do not belong in the same sentence. Let’s see what Carol says:

(I)f he really wants to build a winner, there's a readily available blueprint he can follow. All Ricketts needs to do is look across town at the White Sox.

Ricketts should model a team that won a World Series with an historically terrible offense for a title team, hid their team on pay-tv for years, and currently has a worse record than the Cubs?

Despite the fact that the Sox are rebuilding on the fly, despite the fact that they've been hovering around the .500 mark all season, Williams sees his team as a World Series contender. And he's not shy about saying so.

Ah! So it's "seeing" the team as a contender "despite the fact"s that the team is rebuilding and mediocre.

For the Sox, the message is clear. And it starts at the top, with chairman Jerry Reinsdorf, who hired Williams as the messenger. Manager Ozzie Guillen and his staff are on board. And the players had better be on board, or they won't last long.

Obviously you need more than a winning attitude to establish a winning culture.

Obviously. So, Carol, step #1 really just doesn’t cut it.

The Cubs have spent a lot of money on payroll, especially in the last several years, but they've often spent it unwisely, throwing it at the wrong guys and hoping for a miracle. Among other undesirables, the Cubs have become a haven for emotionally fragile, defensively challenged, non-producing outfielders.

With you here.

If the Cubs have had a plan, it has been indecipherable to most of us.

Still with you.

All organizations make drafting mistakes. But when the Sox' top pick of a year ago, Gordon Beckham, is already making a major contribution at the big-league level, you know the organization is doing something right. And when player after player, from Corey Patterson to Felix Pie, are slow to develop for the Cubs, you know the organization is doing something wrong.

Lost us. Sounds like you are saying that when a high draft pick, ones that fan magazines can identify, pans out, teams are "doing it right." No only a high draft pick, but ONLY ONE high draft pick can give us insight to the whole development system of an organization! Tell us, Carol. What do Aaron Poreda, Kyle McCulloch, Lance Broadway, Josh Fields, Brian Anderson, Roger Ring, Kris Honel, Joe Borchard, Matt Ginter, Jason Stumm, Robert Wells, Jason Dellaero, Bobby Seay, Jeff Liefer, Mark Johnson, Scott Christman, Eddie Pearson, and Scott Ruffcorn tell you about an organization?

For comparative: What does Randy Wells tell you about an organization? (Unbelievable that your jottings actually result in making a defense of Jim Hendry’s minor league operations. That’s what happens with you make a "reasonable" argument)

When Williams went after Jake Peavy, the Sox had enough good prospects to make the deal. In contrast, the Cubs' minor-league system is threadbare.

This doesn’t hold with the winter story line, that Peavy was going to be a Cub, but payroll acceptance was the issue, not Cubs players.

Are the Cubs drafting the wrong guys, or are they failing to develop players properly, or both? If Ricketts hopes to build a team that can contend on an annual basis, he'll have to overhaul the entire scouting and minor-league operations. That's no easy task. But it would be money well spent.

Now you’re back on track. Who has been in charge of the minor leagues for the past 10-plus years? Change there would be a good place to start.

Tribune Co. never figured out how to build a franchise that could be competitive for the long term. They never put a system in place. They never learned how to win. Meanwhile, across town, the Sox have figured it out. Ricketts could do far worse than to follow their lead.

Long term success, thy name is White Sox. How many playoff appearances have the Sox had since 2005? How many have the Cubs had?

To summarize. Demand success. Build a minor league system. Follow a team with a worse record with as many Rookie of the Year candidates that the Cubs currently have.

Brilliance.

Up next... Al Yellon and why Crane Kenney is qualified to be retained as Cub president. As a preview, it’s the same reason 80% of baseball bloggers out there would be qualified.

Open Letter #7,412 to Tom Ricketts and His Family

Everyone seems to be getting their two cents in on what Tom Ricketts should do with the Cubs (assuming the deal actually closes). Ivy Chat only has three pieces of advice:

1) Hire a team president who knows what the hell he's doing. Names being floated for this include Sandy Alderson, Pat Gillick, John Schuerholz and even Theo Epstein. Those all sound like decent choices. The key question to ask them in the interview process is how they approach building a team. If the answer doesn't focus on an overhaul of the disastrous farm system that Jim Hendry has either run or overseen since 1995 (yes, Hendry was the Cubs Director of Player Development starting 14 years ago!), then move on to the next candidate.

Owning this team should be like owning a yacht. It should be your personal plaything to show off to friends and competitors. But don't try to pilot it yourself. Hire a good captain and simply enjoy the ride.

2) Pay down the debt you've accumulated in acquiring the team. Listen. Fans everywhere are thrilled that you are going to rescue the team from the Tribune's profit-oriented ownership. That will free up cash flow for free agents.

But Ivy Chat is quite aware how bank financing works. You likely have the interest rate spreads on your $400 million in debt locked in for only 5 years, and most of that is likely floating rate debt. You have major risks in terms of not only re-finance, but just about everyone expects interest rates to rise which exposes you to the potential of rising debt service costs. This has the potential to divert revenues away from baseball operations. You resolve this by lowering payroll and reducing debt. How do you reduce payroll yet still have a competitive product on the field? See advice piece #1.

3) This last piece is the most important. Once you hire the president (who will hire a new GM who will hire a new manager), STAY OFF THE FIELD AND OUT OF THE CLUBHOUSE.

Make your hires and let the people do their jobs. You can focus on paying down the debt, building the Triangle Building, starting Cubs Network, gutting Wrigley from fair pole to fair pole, and being the Cubs voice in matters with the league. If you try to be Daniel Snyder or Jerry Jones or the pre-1993 George Steinbrenner or Mike McCaskey, not only are the fans going to hate you, but you are also going to fail miserably. You and your family are a bunch of bankers.

Friday, August 21, 2009

Done But For The Details - But BIG Details

The Chicago Cubs will have a new owner, and it's who everyone expected it to be back in January.

Tribune Co. said Friday that it signed an agreement to sell the iconic franchise to the Ricketts family. The family is paying about $800 million to acquire a 95 percent interest in a package of assets: the team, Wrigley Field and Tribune Co.'s 25 percent stake in Comcast SportsNet Chicago, which broadcasts many Cubs games on cable television.

The agreement values the franchise and related assets at $845 million, less than the Rickett's winning bid in January of $900 million. Tribune Co. will retain a 5 percent ownership stake in the joint venture.

So, $55 million came off the price. Oh, wait. $100 million came off the price. Originally, the Ricketts were going to pay $900 million. They are "only" paying $800 million, but because of the 5% holdback by the Trib, everyone gets to say the price is really $845 million.

Like yesterday's piece, this article is silent on the funding aspects of the deal. That could still be an impediment to final closing. Furthermore:

The family will not gain control of the team until after the baseball season ends, probably sometime in October, because there are still a few conditions of closing. Tribune Co. has been in Chapter 11 bankruptcy since December, and a major disposition of assets requires the court's blessing.

As part of the court's approval process, Tribune Co. said it will place the Cubs in Chapter 11 bankruptcy so that the franchise can "emerge free and clear" of the company's financial obligations.

The company said that the Cubs bankruptcy will not interrupt team operations, and player contracts and other agreements with ticket holders, sponsors and supplies are not expected to be affected.

Court approval is expected because Tribune Co. has run a robust sales process that has kept creditors informed throughout, sources said.

Major League Baseball owners also have to approve the deal.

Looks like the Ricketts bid is on third base headed for home and no one is covering the plate. That said, there are many, many things that could still trip this up.

Until the press reports that the Ricketts financing is 100% locked up, nothing is done. Well, except for the approval of the other MLB owners. They want to lock in the price of the Cubs before it falls any further. For each dollar fewer that the Cubs sell means lower valuations on every other franchise.

More than a month after Tribune Co. agreed to broad financial terms of a deal to sell the Cubs to the Rickettses, the two sides are close to completing all the legal documents associated with the large and complicated transaction.

Sources close to the matter said they expected a definitive agreement could be signed within days. The completion of a definitive agreement would mean Tribune Co. would not be able to solicit any other bids for the team, sources said.

Wait! There's nothing there about closing of the sale or final financing arrangements or a date to transfer control. What this says is that the Tribune will have a "definitive agreement." That means that the Trib can no longer talk to the Utay's.

Where's the bankruptcy court sign off? Where's the MLB owners signoff? Is the financing with the secondary debt offering complete?

Until we see information on these rather important details, all this fanfare is simply another step in the process. This is not the final step.

Now, perhaps the Ricketts do have their financing lined up and that's why the Trib is ready to cement their agreement. But this article is silent on that.

More reporting is needed before anyone can say this is more than just a formal end to the bidding process.

Tuesday, August 18, 2009

Tale of Two Quotes

"You have six good starters, counting Gorzelanny. Larry and Lou will make the adjustments, probably strengthen the bullpen obviously too, with that. If we can get Soriano and Soto swinging the bats a little better, and Rammy coming back, then I think your whole offense takes on a different mind-set. "We have players who are good enough. We just haven't been able to keep them on the field or click on all cylinders more than a couple of weeks here or there." - Jim Hendry

"We lost two games we should have won, which [would have put] us a half-game out of first place. We've thrown away a dozen games that way this year, which [has cost] us where I thought we would be, in first place and in a good position. But we deserve what we've got. I'm not happy with a lot of what I see. We're underachievers. We can be a dangerous playoff team, but you first have to play well enough, play smart enough, play intense enough, to where you show you want to be in the playoffs. It can't just be lip service. I don't want to hear it anymore. Get the job done." - Kenny Williams

Now, ask yourself this: Which GM is the one that has the confidence of having won a World Series and which is the one with his job is on the line?

Regardless what happens the rest of the way, the odds of a new owner keeping Jim Hendry on continue to get longer.

Friday, August 14, 2009

Blame Where Blame is Due

The complaining about Piniella and Hendry is now being heard throughout the fandom and the media. I've gotta be real honest here, I wouldn't fire either one over this season. Yes, the team has not lived up to expectations, but they have not been awful either. After the success of 2007 and 2008 I think both Hendry and Piniella have earned the opportunity for a mulligan....I don't want to make excuses for Jim Hendry, but this year the sales process of this club finally caught up with him. He was unable to be aggressive at the trade deadline and unable to add salary as the injuries piled up. In years past, Hendry has been aggressive with his roster during the season. This season he just wasn’t allowed the freedom to do so. I give him the benefit of the doubt. I don’t agree with everything he did last offseason, but I never do. With a new owner in place (if it ever happens) it will be interesting to see what financial constraints Jim Hendry is placed under as he tries to rebuild the Cubs into a contender.

CCD makes some interesting points. But when he said, "the sales process of this club finally caught up with him." CCD failed to note that Hendry would have been fired a long time ago without the sales process!

Back in 2006, the Cubs were a train wreck. Dusty Baker was fired. Andy MacPhail "resigned." Wrigley Field was littered in empty seats. The Tribune was considering a breakup of the company and selling the Cubs. Oh, and the team lost 96 games.

The Trib never really had expended its financial resources to help the club to the limit of their ability. Now that one of their cash cows was under siege, would they defend the brand with money?

The answer was yes. In the winter of 2006, the Cubs spent the following:

Lou Piniella - $16 million over 4 yearsAlfonso Soriano - $136 million over 8 yearsAramis Ramirez - $73 million over 6 yearsTed Lilly - $40 million over 4 yearsJason Marquis - $30 million over 3 years

A year later it was Kosuke Fukudome and Derrek Lee that got big money.

That's the core of your 2007 and 2008 Central Division Champs.

What do they have in common? All free agent signings or expiring contract extensions. In other words, the only reason these guys are here is money. And, in several cases significantly more money than anyone else was offering.

If the Cubs hadn't been awful AND for sale going into 2007, most of these moves would not have been made. Jim Hendry would have had more losing teams. That and the lack of development from the minors of position players would likely have led to his exit after the 2007 season.

Hendry came from the college ranks. You'd think a college coach would know a thing or two about scouting young talent. That the minors have developed only Geovany Soto, Ryan Theriot, Corey Patterson, Felix Pie and Mike Fontenot (originally an Oriole prospect) over the past 10 years is pathetic. Hendry was only allowed to cover these mistakes with an open pocketbook. And that pocketbook was only open due to the combination of the sale and the awful team Hendry had put together.

Hendry's recent success was entirely due to the sale process. To say that the sale process finally caught up with him IS making an excuse.

Wednesday, August 12, 2009

What To Do About...

The Bullpen: Not much you can do. Carlos Marmol has less control than Nuke LaLoosh and Kevin Gregg pitches balls that have bleacher reservations built into them. The idea of moving Angel Guzman into the closer role has some merit, but how many teams have been able to take a guy like Guzman, who has never pitched in a pressure situation before, who has never closed, and have him be effective in the role.

Want a really radical idea for a closer? No, not Rich Harden. How about Carlos Zambrano? With his injury status this year, maybe one inning 4 times a week would be better than 7 innings twice a week. Carlos closing would also prevent him from wrenching his back further as he wouldn't bat anymore. Hell, it worked for John Smoltz.

In reality, there's very little that can be done without something seemingly insane. The bottom line is that unless Carlos Marmos re-discovers his control and Kevin Gregg stops serving up marshmallows, the Cubs don't have much of a chance. Jim Hendry has really never been able to fill out a bullpen. That has not changed in 2009.

The Offense: This unit will struggle the rest of the year unless a healthy Aramis Ramirez returns. A few weeks ago, it was reported that he'd need surgery to correct his problem. Then, he came back and hit a few homers. Maybe the reports were wrong.

But now the shoulder is bad again. And surgery rumors are floating again.

There is one equation here: Can you win a World Series with Aramis injured as he is? If the answer is yes, then you deal with his injury and have the surgery in November. Then, Aramis is back in May or June 2010. But if you can't win, maybe for reasons having more to do with the rest of the team than Aramis himself, you shut him down now, have the surgery and have him back in time for Opening Day 2010.

As to the rest of the team, the only real other hope is that Alfonso Soriano wakes up and carries the team for two months.

Thursday, August 06, 2009

Not Good

Barry Rozner used to be a good read. Something happened to him a few years ago and he's spiraled down to Morrisey levels. Take this from today. Only 3 sentences, but 67% of them are mind numbing:

It wouldn't be shocking if the White Sox find a way to have Jake Peavy start at Wrigley Field in a makeup game Sept. 3, furthering the pain Cubs fans already feel about the Peavy trade to the South Side.

And some of those injured fans have taken to blaming GM Jim Hendry for failing to land Peavy, but Hendry did everything he could for the better part of eight months and is not the reason Peavy finally accepted the Sox' deal.

Sam Zell is the one to blame, as Peavy finally gave up on the notion that the Cubs sale will get done before Peavy reaches retirement.

So, the White Sox, despite winning a World Series a few years ago, having Cubs owner Sam Zell as part of their ownership group, and broadcasting their games on the Cubs' parent company's TV station wants to make the Cub fans feel more pain?

About not having a pitcher who hasn't pitched in months and is on the DL?

Right.

And what Cub fans are blaming Jim Hendry? Not even the Oldest Murton does that. At 9, even he knows what's going on and that budgets are frozen. Hell, he even asked the other day which type of bankruptcy the Glen Town Center might go through. "The kind where the sell it all or the other kind?"

But Barry closes nicely. Sam Zell is to blame. And the sale that was going to be done two weeks ago (according to David Kaplan) is not anywhere near completion.

Nice recovery. Next time, start with the good stuff and leave the drivel out.

Ignorable

This blog has been dark for a while because the Cubs are rather uninteresting right now. They've been playing lousy teams and beating them as they should. They have a 2 game lead over St. Louis in the loss column, so all is well. With all this, you figure that the weather was beautiful last night, so why stay inside to watch a decent team play a lousy team.

Good choice given the Cubs' play. So, they got shut out. Big deal. Over 162 games, nights like this are going to happen. You run into a decent pitcher who has a good game and the better team losses.

But then you wake up and read the paper and you read some very disturbing things. Things that make you VERY glad you didn't stay and watch the game.

- Cincinnati's Justin Lehr pitched a shutout in only his second big-league start. But he's not a real rookie. He's 32. And he's won a game before. As recently as 2006!

- Aaron "Neifi" Miles not only played, but batted second making you wonder if Dusty Baker made out both lineups last night. Miles lived up to all out expectations with an 0-3 and a non-hustle grounder to short that he lollipopped to first too late for an out. Piniella said: "Let's hope he's just rusty." Oh, Lou! How kind you are! We all know you didn't want to say "rusty."

Hey, that's an idea. The Murtons got a dog last week and named him Rusty. Maybe we should change his name to Aaron? Oops. Can't. We took the dog back. Damn good thing we didn't adopt the dog at Jim Hendry's Pound where you are required to keep a dog no one else wants for two years.

- The Cubs only got 4 hits suggesting everyone took, "a day off a little too early," as Rich Harden said. Even Alfonso Soriano, who woke up for a few games last week, flashed his instincts as a baseball player and got picked off again.

You know, if the Cubs are going to take days off on game days, we can all take a day or two off and not pay attention to them. It's not like we expected this team to be any good. Even Lou knows this. "St. Louis is the team to beat. Let's not lose sight of that. They have a good ballclub and they have added some nice firepower to their lineup. Let's put the attention on them and leave us alone."